MARKET WATCH: More gasoline, stronger dollar undercut energy prices

Energy prices continued their recent pattern of up one day, down the next on Oct. 28, with crude dropping below $78/bbl in the New York market after the Department of Energy reported a larger than expected increase in US gasoline inventories.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 29 -- Energy prices continued their recent pattern of up one day, down the next on Oct. 28, with crude dropping below $78/bbl in the New York market after the Department of Energy reported a larger than expected increase in US gasoline inventories.

Other factors also influenced the market. “Crude oil fell on dollar strength, neutral weekly DOE crude data, and concerns that today’s gross domestic product forecast will come in below the market estimate of 3.2%,” said analysts at Pritchard Capital Partners LLC in New Orleans. They said, “Concerns grew when new home sales fell by 3.2% vs. the 2.6% [estimated decline].”

DOE’s Energy Information Administration reported crude inventories increased only 800,000 bbl to 339.9 million bbl in the week ended Oct. 23. Gasoline stocks climbed 1.7 million bbl to 208.6 million bbl. Distillate fuel inventories decreased by 2.1 million bbl to 167.8 million bbl (OGJ Online, Oct. 28, 2009).

Pritchard Capital Partners said, “The report in itself was neutral for the crude price, but broke the trend of the past two reports that showed draws in both gasoline and distillates.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “With the recent substantial increase of speculative length in reformulated blend stock for oxygenate blending (RBOB), the gasoline crack came rapidly under pressure. There has been in recent weeks some reduction in the US stocks of gasoline on the back of lower imports, but it is also a fact that overall stocks of clean petroleum stocks are very high on the back of the contango in distillates, and the US will not be able to sustain a reopened gasoline arbitrage for very long just because the tank shell capacity is pretty much maximized.”

Furthermore, he said, “Lack of a distillate pull is not providing the same distillate-to-gasoline premium as last year and as a result the refining yields have been this year gradually turned less towards distillate and more towards gasoline, making for more production of gasoline than last year with lower crude runs.” Jacob noted, “Overall crude oil imports are down as much as crude production is up [vs. a year ago], and the imbalance in the supply and demand is still on the demand side and still on distillates. Crude prices have shot up very quickly from $70/bbl to $80/bbl, but nothing has structurally changed in the last few weeks on the fundamental side.”

He said, “West Texas Intermediate remains in a strongly correlated trade to the dollar and equities; it is difficult to say when the breaking point will come, so we need to continue having some respect for that computerized relationship.”

In addition to lower prices for energy commodities, the Oct. 28 equities session “was a kick to the gut for energy stocks,” said analysts in the Houston office of Raymond James & Associates Inc. “The broader market was one of the largest culprits as the Dow Jones Industrial Average fell 1.2% after data showed new homes sales fell unexpectedly and increased concerns about the speed of the economic recovery. While this could be just another short-term correction, the market has not had a larger than 3-4% correction in the last 8 months. The next 2 weeks should be telling.”

Oil prices were up in early trading Oct. 29 on a report the third-quarter US GDP grew at a rate of 3.5% vs. Wall Street’s expectations for 3.3% growth.

Energy prices
The December and January contracts for benchmark US light, sweet crudes dropped $2.09 each to respective closings of $77.46/bbl and $78.06/bbl Oct. 28 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., was down $2.09 to $77.46/bbl in lock-step with the front-month futures contract. Heating oil for November lost 5.82¢ to $2/gal on NYMEX. RBOB for the same month dropped 8.41¢ to $1.99/gal.

The November natural gas contract, which expired in volatile trading at the end of the session, fell 26.8¢ to $4.29/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., increased 3.5¢ to $4.55/MMbtu.

“Natural gas fell on concerns that new coal-fired generation plants coming on line will lead to lower power generation demand for natural gas,” said Pritchard Capital analysts. “One firm reported ‘16 Gw of new coal units entering service over the next 4 years,’ and that the EIA ‘expects 267 Gw of new, non-hydro renewables capacity added by 2020.’”

The proposed new coal plants are not a surprise to the gas industry because of the long lead times required. However, analysts said, “The additional power generation capacity from renewables is a new estimate, but most of the capacity for the renewable power generation will not be added until after 2011.”

In London, the December IPE contract for North Sea Brent crude dropped $2.06 to $75.86/bbl. Gas oil for November lost $16 to $624.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was down 90¢ to $75.53/bbl on Oct. 28.

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